E-commerce merchants are dealing with rising fraud, and in response, they're putting stronger safeguards in place to try to protect against these unlawful transactions. However, e-commerce companies often over-correct for the threat of fraud, leading to false declines, also known as false positives, which occur when a legitimate transaction is rejected.

These false declines are becoming a costlier problem than actual fraud — US e-commerce merchants will lose $8.6 billion in falsely declined transactions in 2016, according to our estimates. This amounts to over $2 billion more than the $6.5 billion in fraud they will prevent, meaning that false declines are undermining these merchants' ability to effectively combat fraud.

A new report from BI Intelligence looks at the rising cost of fraud and how false declines are actually a larger direct cost for merchants than fraud itself. We also identify the reasons why e-commerce and mobile commerce companies are particularly vulnerable to these trends. And lastly, we lay out some of the major causes of false declines and the most important solutions being put in place to try to combat this problem.

Here are some of the key takeaways:

Fraud is rising in the US, costing merchants 1.47% of annual revenue in2016, up from 0.51% in 2013. As fraud eats into revenue, merchant processors and acquirers are seeking to blunt its impact by enforcing strict rules to block suspicious transactions.

False declines — valid transactions that are incorrectly rejected — are unintended consequences of e-commerce merchants' fraud prevention strategies.False declines, also called "false positives,"will cost e-commerce companies $8.6 billion in 2016, according to our estimates. This eclipses the $6.5 billion in prevented fraud, meaning false declines must be reduced in order for merchants' fraud prevention strategies to be cost effective.

Causes of false declines fall into three buckets.False declines can be caused by identity-related, technical, or structural issues. Examples of causes include conflicting shipping and billing information, outdated card information, and differing risk appetites among issuers and merchant acquirers/processors.

There are solutions for two of the types of causes.E-commerce merchants can solve identity-related problems by requiring their customers to authenticate themselves through more accurate means, such as 3D Secure and biometrics. Merchants can solve for technical issues associated with false declines by using smart routing, card updaters, and local domains.

But structural problems are limiting the effectiveness of these solutions.Each issuer, acquirer, and processor makes decisions on fraud using their own set of standards. This makes it difficult to contain the problem of false declines because stakeholders can't control each other's criteria.

In full, the report:

Estimates the cost of false declines compared to fraud losses and prevented fraud.

Determines the effectiveness of e-commerce merchants' current fraud prevention strategies.

Categorizes and explains the various causes of false declines.

Uncovers the potential solutions to solving false declines.

Provides guidance on how merchants can minimize the issue of false declines going forward.

Interested in getting the full report? Here are two ways to access it:

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